Costs rise, competition takes market share – Coinbase stock analysis

Coinbase is a cryptocurrency trading platform, aimed at both individuals and institutional investors. It was founded in 2012 as a tool to simplify the purchase of Bitcoin and grow into one of the most famous crypto exchanges. For retail investors, Coinbase is a ready and easy-to-use solution for trading cryptocurrencies.

The main sources of income are, as with most exchanges or brokers, trading fees and income that they collect through the spread in price. They also offer a Coinbase card, have a cryptocurrency payment solution intended for online retailers and their own stable coin USDC. According to CoinMarketCap data, the daily trading volume on Coinbase is about $2-3 billion and weekly visits from about 2 million users. Most of the volume on Coinbase accounts for institutional trading, as much as over 70%. Before going public on April 14, 2021, it was valued at $250 per share. On the first day of trading, the price reached up to $429 and closed at $328. As of today, Coinbase's share price is down over 80% and the week has ended at $49.

For management, this is a year of investments, but they have reduced costs by laying off workers

When asked by shareholders what the future holds for Coinbase in relation to rising competition and falling trading fee prices, the CEO states that 54% of users do more of this than direct trading – e.g. they spend cryptocurrencies, borrow or deposit for interest. In terms of competition, he believes that trust and ease of use are what make Coinbase safe from the competition. Trust, because they have been on the market for a long time, because they are a public company and care about the safety of users and their funds. Ease of use, because they have brought the complicated world of cryptocurrencies closer to ordinary users in a simple way. It compares it to electric current – most don't know how it works, but they can still benefit from it. Also, they feel that the competition has concentrated on individual solutions and they offer great breadth within one platform.

They employed about 3,700 people, but in the past two weeks they have laid off about 18% of their employees. CEO Brian Armstrong assumes that we are entering a recession, which could lead to a new "crypto winter", a period of reduced trading volume and sunken cryptocurrency prices. He also states that their biggest source of income comes from trading fees and with layoffs they cut costs for the upcoming difficult period.

The CFO emphasizes that at the moment they prioritize investment rather than profitability, they are focused on growth and 2022 is an investment year for them. She also stated that they have smaller stakes in related companies in which they see potential and cites opensea, alchemy, Dapper Labs, TaxBit, Uniswap and Compound. One of those investments is the NFT marketplace. It was launched on April 20 and has so far gathered a modest number of users of about 8 thousand in total.The CEO states that he is satisfied with the results, but that NFTs have not yet been included in the main distribution channels and that they are working on new functionalities and do not want to release the figures on new projects to the public. He expects NFTs to play a major role in the gaming industry, music, decentralization and metaverse, but also in the real world as an alternative to tickets to events or forms of certification.

Solvent but turnovers are falling and costs are rising

Important to mention is that they went on the stock exchange on 14.04.2021 and the bull market of cryptocurrencies started in Q3/2021 and peaked in mid-Q4/2021. A significant drop in turnover was felt already in the third quarter of 2021 compared to the previous one, also in the first quarter of 2022 compared to the fourth quarter of 2021, which was supported by the bull market. Reports show that sales costs grew convincingly from quarter to quarter, operating expenses as well. Net profit is therefore declining and a significant loss of 430 million was recorded in the first quarter of 2022. In the last quarter, the number of shares in circulation decreased by 35 million. Management maintains a healthy liquidity ratio (1.5-1.6). Assets are sufficient to cover short- and long-term debts and could be repaid immediately. Investments cited by the CFO are indeed seen in the balance sheet – long term investments in Q4/2021 amounted to 365 million dollars and in Q1/2022 401 million dollars and in previous reports it was less than 30 million per quarter.

  

  
COIN Fundamental Data by TradingView
  

At the moment the EPS TTM is 10.42, PE TTM 4.71. and Forward PE is about 60. It is difficult to compare the data with Coinbase with the data of a similar company on the stock exchange because no other company in the finance sector deals exclusively with cryptocurrencies. But for comparison, CBOE has PE 24, Forward PE 17, IBKR has PE 20 and Forwarde HAS PE 13, SQ forwarde PE is 41. From that perspective, Coinbase continues to seem overrated. Forecasts for Q2/2022 are revenues of $933 million, down 20% from Q1 and EPS -2.16, down 10%.

Competition takes over market share

I compared Coinbase to other crypto exchanges and the current figures are ruthless. By daily volume, at the time of writing, the fifteenth on the list is on the list and the main competitor Binance has 7 times the volume. It is important to note that Coinbase does not have margin trading, Binance does. The trading volume of the last three months, taken from the nomics.com, shows that Coinbase has returned to volumes from the end of 2020. In terms of the number of weekly visits is the eleventh in a row, Binance has 10 times more visits, and also famous competitors – FTX twice as many and Kraken 40% more. Also Binance and FTX have a significantly higher number of cryptocurrencies available for trading. Kaiko announced a month ago that FTX had overtaken Coinbase in trading volume and rumours surfaced about a potential purchase of Robinhood by FTX.

I would briefly conclude that they have managed the assets well so far and have good margins but the turnover has melted. They don't have a solution for the "crypto winter" other than cutting costs and they did so by laying off 18% of employees. It seems like a drastic move and it happened already at the end of this quarter, so I would assume that it cannot significantly positively affect the results of the second quarter. Out of sympathy for investors who didn't get out on time, I hope the bottom is around here somewhere. It remains only to see and wait until August 9 for the new quarterly financial report. Until then, I'll avoid it.